A strategic plan for this market

Thomas H. Kee Jr. is the president and CEO of
Stock Traders Daily (dotcom), where he offers strategies and newsletters to
both institutional and individual investors, and he manages money privately for
both institutional and individual investors through Equity Logic LLC. A
specialist in technical analysis, Kee is also the founder of one of the leading,
longer-term fundamental economic and stock market indicators in history, The
Investment Rate. This proprietary tool, which is available to clients, too,
predicts major economic cycles well in advance, and has been accurate since
1900. Using his broader observations of the economy to define disciplines, Kee
has been able to accurately predict market cycles in advance using his
multi-tiered technical indicators, and that combination has kept him ahead of
the curve since starting Stock Traders Daily in January 2000.

(Correction: The column “A strategic plan for this market,” published on May 18 originally stated that “The second rule says if our DDM position experiences a 0.05% loss after triggering ...” This was incorrect. The corrected column appears below.)

Some people think that this is a tough market, but I have a strategy that I call "The Strategic Plan" that makes this otherwise very confusing market environment much easier to navigate. Although I call it Strategic Plan, you can call it anything you want because I am going to teach you how to use it so you can do it yourself, and that means you can rename it, but don't overcomplicate it.

First, I must issue a warning. This strategy is so simple that most people are going to tell you that it can never work, but I believe in the "Keep it Simple" approach, this strategy has worked very well for us in the past, and I know it can work. Since we began using The Strategic Plan in January 2009, we have averaged over 20% per year, which is about 21% better than the Dow over the same period, but this strategy is not one-sided, and that is what makes it different. It can work if the market declines too.

Importantly, The Strategic Plan has integrated risk controls, it can work in any market environment (up or down), regardless of economic conditions, and it can be followed without listening to the news every day and without reacting to every headline, but it is never short anything, so it is also okay for IRAs. We get same-day settlement for our IRA clients, so that means they can control risk very efficiently as well.

A second warning is that this strategy is counterintuitive to human nature. We, as investors, always want to be right, but this strategy assumes that we will not be right. In fact, it completely removes the burden of determining market direction from the investment process, so we do not have the responsibility of picking a side. Diplomatic as this may be, the Strategic Plan is hard for some people to follow because many people want to pick a side even though this market has been sideways for over a decade now. Picking a side has been less profitable than changing sides once in a while.

The Strategic Plan automatically changes sides when the market makes important moves, and it reacts to longer-term changes in trend based on a strict set of rules.

It starts with a one-year chart of the Dow Jones Industrial Average. Using a straight-line technical analysis (DO NOT USE MOVING AVERAGES), find obvious longer-term support and resistance levels. These important levels are usually 500-800 points away from each other, but that differential can skew from time to time.

When the above simple observation is made a series of data points will be found. Construct a simple array, from highest to lowest, and record those numbers. Although these numbers can change, because we are using a longer-term chart, they do not change often. Therefore, we only need to conduct this analysis once, and then review it occasionally, so the workload from an analytical standpoint is minimized as well.

However, that does not change the challenge in the second warning above. For example, if a support level is tested and we buy, we want the market to go up, but we may not be right; the Strategic Plan accounts for times when we will be wrong.

The rule is to buy the double long Dow ETF,
DDM, +0.27%
when the Dow is within 25 points of a defined support level, so in our example, we would not take action in the middle of the channel. Instead, we would sit patiently, wait for the market to reach one of our defined levels, and then take action from there.

Because we wait for a test like this, we are also able to keep a tight control of our risk exposure. The second rule says if our DDM position experiences a 0.5% loss after triggering we should sell it and revert to the 25-point rule. If, at that time, the Dow is under our parameter but still within 25 points of the parameter (on the downside), we would buy the double short ETF,
DXD, -0.42%
and position ourselves on the downside. The catch comes in the repeating of these simple rules.

In the case above, we bought DDM, stopped, bought DXD, but the same 0.05% risk-control measure still applies, so it could happen that the market moves back over that parameter again, we are stopped again, and we revert to DDM again too. In fact, this could happen a number of times in a row, and it could become psychologically draining for a person who wants to be right all of the time, but for those persons who can let go of the need to be right, for those persons who can be diplomatic as that pertains to market direction, and for those persons who appreciate controlling risk and being able to realize reward in any market environment, The Strategic Plan is an excellent fit.

Once the market starts to move from that parameter, we just hold the position, wait for a 10% gain (5% market move), and secure gains at 10% when the opportunity comes, then repeat the process.

Call it whatever you want, but the combination of the 25-point rule, 0.05% risk control rule, reversion rule, and 10% gain rule, in combination with the Dow and the Dow-ETFs DDM and DXD, can be very powerful. Keep it simple, do not try to complicate it, and don't listen to the people who say it is impossible. This is possible, we have been doing it for years, and anyone can do this. In the market environment we are in today, a strategy with these qualities is priceless.

Disclosure: The Strategic Plan is long DXD, but positioned to secure gains soon.

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